Phased revenue recognition, as described outlined in IFRS 15, is mainly used for primarily applied to long-term contracts, such as those in construction where a project construction projects that extend over an extended period, like building a villa spans over 12 months. This Under this approach involves recognizing , revenue and costs according to are recognized progressively based on the contract’s progress completion stage rather than just when invoices are issued. Although solely upon invoicing. While partial revenue can be recognized recorded as a contract asset, it can't cannot be recorded classified as receivables until all contractual obligations are fulfilledmet. Only after this then can an invoice be issued and recognized.
This method is not limited exclusive to construction firms but companies; it also applies to service companies providers with long-term contracts. Instead of recognizing revenue and costs only at the time of upon invoicing, this approach allows revenue can be recognized based on the progress of the contract, reflecting various stages to be recorded in alignment with the contract's progress, capturing different phases of completion.
To set up phased revenue recognition, you need to:
- Go to Administration > General Settings > Enable Phased Revenue Recognition.
- Access the specific contract > Terms tab > activate Phased Revenue Recognition
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- To associate costs with specific cost objects, enable Advanced Product Costing on the Administration > Settings > Production form and choose which objects can be used as cost objects: Customer Order, Project, Project Task, or Item.
To create a Phased Revenue Recognition document, -
go to Project Costing> Phased Revenue Recognition.
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On the Main tab, you can enter general information such as the customer, contract, project, and other relevant data. Key fields include:
The Revenue and Costs tab is a critical component for managing revenue recognition. This tab allows us to handle both the revenue and the associated costs for the work items in a phased manner. The tab consists of two main panes: Services and Work Costs.allows users to list and manage items for revenue recognition in phased contracts. It includes two panes:
- Services Pane: Lists work and service items for revenue recognition. Users can specify item details, quantities, discounts, and recognition percentages.
- Work Costs Pane: Displays associated costs for listed services, with options to view costs from previous recognition phases.
This tab helps track recognized revenue and costs based on contract progress, ensuring accurate financial reporting.
The Services Pane allows adding and managing Work/Service items with details like quantity, price, discounts, VAT, and optional characteristics. Additionally, some more fields need to be filled i.e.
Already Recognized: The Already Recognized Quantity and Already Recognized Revenue columns show the revenue and costs recognized in previous phases. You can access more details in the Costs Recognized for Previous Phases tab if necessary.
Revenue Recognition Percent/ Current-Phase %: Specifies the percentage of total revenue to be recognized in the current phase.
Cost Details: The Total Cost and Already Recognized Costs columns show the costs associated with the work, including previous recognitions.
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For ongoing projects, enter beginning balances for work-in-progress and contract assets—track costs with appropriate documents and reports. When recognizing revenue for a completed phase, use Phased Revenue Recognition documents to account for costs and revenues.
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